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Property insurance policies, like other insurance policies, contain an overall limit of liability, which is the maximum amount that the insurance company will pay for any given loss.  In addition to an overall limit, policies may also contain “sublimits” of liability that apply to certain types of perils or damage.  A sublimit is less than the overall policy limit.  It is not uncommon to see sublimits pertaining to catastrophic losses, such as losses caused by hurricanes, earthquakes, and floods.  In addition, sublimits typically apply to business interruption losses and the cost to remove the debris resulting from a covered loss.

An issue that often arises in connection with large losses is whether an insured can “stack” multiple sublimits under a policy to increase its overall recovery.  In other words, can an insured recover under multiple sublimits as long as the total of the potentially applicable sublimits does not exceed the overall policy limit?  Resolution of that issue obviously turns on the particular policy language at issue.  However, courts do not always interpret policy language in the same way, which can give rise to inconsistent decisions.

In Oxford Realty Group Cedar v. Travelers Excess and Surplus Lines Company, A-85-15, 077617 (N.J. May 25, 2017), the New Jersey Supreme Court dealt with a stacking issue involving flood damage caused by Superstorm Sandy.  The insureds in that case were the owners and managers of an apartment complex located in Long Branch, New Jersey, which sustained significant flood damage.

The policy contained a $1 million sublimit for “all losses” caused by flood.  However, the policy also contained a separate, “additional” $500,000 sublimit for debris removal.  The insureds sought to recover $207,961.28 in debris removal expenses in addition to the $1 million in flood coverage.  The insurer denied any claim in excess of the $1 million flood sublimit.

The main policy form contained an exclusion for flood damage.  Flood coverage was added to the policy, however, by way of endorsement.  The endorsement provided that “[t]he most [Travelers] will pay for the total of all loss or damage caused by Flood in any one policy year is the single highest Annual Aggregate Limit of Insurance specified for Flood shown in the Supplemental Coverage Declarations,” which was $1 million. The endorsement further provided that the limit applied to “all losses covered under this policy … [o]ccurring at Insured Premises resulting from Flood to buildings, structures or property in the open within Flood Zone A … or property in or on buildings or structures located within such Flood Zones ….”  With respect to the potential application of multiple sublimits, the endorsement provided:

If more than one Annual Aggregate Limit of Insurance applies to loss or damage under this endorsement in any one occurrence, each limit will be applied separately, but the most [Travelers] will pay under this endorsement for all loss or damage in that occurrence is the single highest Annual Aggregate Limit of Insurance applicable to that occurrence.

The “single highest Annual Aggregate Limit of Insurance” that applied to the loss at issue was the $1 million flood sublimit.

The trial court held that the policy unambiguously limited the insureds’ maximum recovery to the $1 million flood sublimit.  The Appellate Division, interpreting the same policy language, reversed, concluding that the insureds could recover under both the flood and debris removal sublimits.  On further appeal, in a five-to-two decision, the New Jersey Supreme Court agreed with the trial court and reversed the decision of the Appellate Division.

The Court began its analysis by noting “that absent the Flood Endorsement, the Policy would not cover any flood damage.”  According to the Court, that endorsement “places a hard cap on the amount recoverable for flood damage.”  The Court noted that the policy specifically provides that “[t]he most [Travelers] will pay for the total of all loss or damage caused by Flood . . . is the single highest Annual Aggregate Limit of Insurance specified for Flood shown in … the Supplemental Coverage Declarations,” which was $1 million.  The Court further noted that the policy:

fortifies this hard cap by explaining that, even if multiple Annual Aggregate Limits of Insurance apply to flood damage, the Limit of Insurance specified in Section B.14 of the Supplemental Coverage Declarations is the most Travelers will pay. Section B.14 sets that Limit of Insurance at $1,000,000.

The Court observed that the Eighth Circuit’s decision in Altru Health System v. American Protection Insurance Co., 238 F.3d 961 (8th Cir. 2001), further supported its conclusion.  The court in that case dealt with similar policy language, and also concluded that the insured’s losses were capped by the flood sublimit.

The insureds argued that the policy was ambiguous and that, therefore, they were entitled to coverage under the contra proferentem and/or reasonable expectations doctrines.  The Court noted that, as a general rule, “courts construe insurance contract ambiguities in favor of the insured via the doctrine of contra proferentem.”  The Court correctly observed that “[s]ophisticated commercial insureds, however, do not receive the benefit of having contractual ambiguities construed against the insurer.”    As to whether the insureds were “sophisticated,” the Court noted that the policy at issue was a surplus lines insurance policy, which can only be obtained through a licensed surplus lines insurance broker.  The Court then noted:

Insureds procure surplus lines policies covering commercial risk through insurance brokers, thus involving parties on both sides of the bargaining table who are sophisticated regarding matters of insurance.

The Court also noted that “similar to the doctrine of contra proferentem, the doctrine of reasonable expectations is less applicable to commercial contracts.”  Under that doctrine, ambiguous and/or misleading language in an insurance policy is considered in light of the insured’s reasonable expectations as to coverage.  The Court did not rule out the doctrine’s application to commercial insurance policies.  It just found it to be “less applicable.”

Thus, it appeared that the Court was of the view that neither doctrine was applicable because the insureds in the case before it were sophisticated commercial insureds.  At the conclusion of its opinion, however, the Court stated that “[b]ecause we do not find the terms of the Policy ambiguous, we need not address Oxford’s contentions about contra proferentem or the doctrine of reasonable expectations,” thus rendering the Court’s comments dicta.

Justice Fernandez-Vina wrote the majority opinion, in which Chief Justice Rabner and Justices LaVecchia, Patterson, and Solomon joined.  Justice Albin wrote a dissent in which Justice Timpone joined.  The dissenting justices were of the view that the policy was “hopelessly ambiguous and needlessly complex,” somewhat dramatically comparing the policy language to the “Enigma code.”  Justice Albin summarized his position as follows:

Because reasonable minds can differ about the meaning and interplay of the flood insurance and debris removal clauses in the insurance policy and because Travelers drafted the ambiguous policy terms, I believe that the insured’s interpretation should prevail under the doctrines of contra proferentem and reasonable expectations.  I therefore respectfully dissent.

The flood sublimit clearly stated that it applied to “all loss or damage caused by Flood.”  The phrase “all loss or damage” is clear and unambiguous.  Moreover, the flood endorsement clearly stated that in the event multiple sublimits applied, the most Travelers would pay would be $1 million.  Thus, the majority reached the correct decision.  The Court’s decision also is consistent with sublimit decisions by courts in other jurisdictions, like Six Flags, Inc. v. Westchester Surplus Lines Ins. Co., 565 F.3d 948 (5th Cir. 2009), New Sea Crest Healthcare Ctr., LLC v. Lexington Ins. Co., 2014 WL 2879839 (E.D.N.Y. June 24, 2014), EL-AD 250 W. LLC v. Zurich Am. Ins. Co., 13 N.Y.S.3d 68 (N.Y. App. Ct. 2014), and Orient Overseas Assoc. v. XL Insurance America, Inc., 2016 WL 2770278 (N.Y. Sup. Ct. May 11, 2016), as well as Altru, which was specifically cited by the Court.

Justice Albin, on the other hand, essentially went with the “old school” view that insurance policies should be interpreted in such a way as to maximize coverage even when issued to sophisticated commercial insureds who are represented by equally sophisticated insurance brokers.  The majority decision represents a more moderate approach in interpreting insurance policies that is consistent with the approach the Court took in Templo Fuente De Vida Corp. v. National Union Fire Ins. Co., 224 N.J. 189 (2016), which was discussed in a prior blog post.

© William D. Wilson and NJInsuranceBlog.com, 2017.  Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited.  Excerpts and links may be used, provided that full and clear credit is given to William D. Wilson or NJInsuranceBlog.com with appropriate and specific direction to the original content.